WHEN a trader asks a colleague to submit false information in order to boost his profits, the correct answer is not “done...for you big boy”. This response was one of a host of exchanges involving 14 Barclays traders that were revealed this week as part of a probe by Britain’s Financial Services Authority (FSA) and American agencies including the Commodities Futures Trading Commission (CFTC) and the Department of Justice (DoJ).
The probe relates to LIBOR, the London inter-bank offered rate. LIBOR is supposed to be a trusty financial yardstick, measuring the costs banks face when they borrow from one another. Set each day, LIBOR determines the prices of loans and derivatives contracts worth several multiples of global GDP. The flaw in the system is that banks can estimate their own LIBOR rates. Although these estimates are supposed to be calculated by a team that is ringfenced from other parts of the bank, the probe shows that they were influenced at the behest of Barclays’ traders.
Back in 2006 the Barclays staff involved had little thought for the wider ramifications of distorting LIBOR. They had more important things on their minds, like champagne. Asked to fudge the numbers by a competitor bank, Barclays acquiesced. The grateful reaction: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.”
The traders involved were those placing bets on interest-rate derivatives. These contracts are large enough—the total market was worth $554 trillion in 2011—that small price changes can mean big profits. Indeed, other messages revealed that for each basis point (0.01%) that LIBOR was moved, those involved could net “about a couple of million dollars”. Given this sort of payoff, one bottle of Bollinger seems a bit mean.
For Barclays, this is beyond embarrassing. The e-mails—the FSA tracked 257 messages asking for LIBOR and its yen and euro equivalents to be altered—make painful reading. The fact that the investigation involved the FBI is a reputational disaster in itself. To its very slight credit, Barclays has not blamed this on rogue traders: its CEO, Bob Diamond, and other senior executives have positioned this as a failing of the bank as a whole. Mr Diamond and three other senior staff have volunteered to forgo their annual bonus this year.
The savings will not offset the fines Barclays has been handed. The bank received a £60m ($93m) fine from the FSA, the biggest ever doled out by the regulator (even after a 30% reduction because Barclays co-operated). This number still pales beside the penalties imposed by the CFTC and DoJ, which brought the total fine to £290m, around 10% of pre-tax profits in the bank’s most recent financial year.
The share price actually rose on news of the settlement: investors presumably hope this will draw a line under the LIBOR investigation. But the FSA’s report includes a mine of information on exactly how and when LIBOR was being manipulated. This will be useful for claimants in civil cases being brought against Barclays in America, says Anthony Maton of Hausfeld, a law firm representing claimants there. Barclays is also likely to face new civil cases, including in Britain, as customers on the wrong side of LIBOR movements bring claims.
Other banks have reason to fret. At least 12 banks are involved in LIBOR investigations around the world: the Barclays fines may herald similar penalties for other lenders. More disturbing still, if banks did distort money markets then they affected anyone with a LIBOR-linked contract. That would open them up to claims stretching far beyond their own customers.